Debt Pay Off Before a Home Purchase
Updated: Apr 26
I often get questions from buyers about how to pay off debts before a home purchase. Here are my top tips, in order of importance.
General advice:
Keep up with minimum payments across all accounts.
If you don't, your credit can drastically decrease in such a way that can't readily be removed for years. Decreased credit can increase the interest rates you incur, especially for new debt.
Establish a budget & stick to it if you don't already have one that you stick to.
Effective budgeting & sticking to it is critical to getting out of debt, no matter how much or how little you make. Intuit Mint is a good free resource.
Any benefit of credit card points or cashback is severely outweighed by interest on credit card debt if your actions have demonstrated that you have difficulty with overspending. Credit cards have a proven track record of people tending to spend more than they would otherwise. If you have credit card debt, it's generally best to shift to spending exclusively on debit cards, not even considering going back to credit cards unless you develop a proven budgeting & savings track record for at least 3 years after you're out of credit card debt. I say that as someone with over 30 credit cards and a Facebook group I started of around 4k people at the time of this publication on credit cards and travel hacking. To keep your credit cards active if they're not carrying a balance, do a charge for around $5/month, with automatic payments in full. Also, establish alerts so that if anyone ever spends fraudulently on your accounts, you get a text update. If there's only an option for email updates, use this workaround for getting texts.
Get educated on credit.
Credit education can be especially helpful for increasing your credit score which can decrease the rates of any future debts.
Here you can get your full credit reports once a year free.
At Experian.com there is a free version for your report on an ongoing basis & Experian FICO credit score.
Creditkarma.com has free Transunion & Equifax information, which can be helpful, but don't rely on the score, as it's a "Vantage Score", also known as "FACO score" by some, which can be 100 points different than what the lender might pull at times since it's a completely different model to a higher degree than FICO scores from the same bureau.
Here is a list of credit counseling agencies available in VA. If using an agency, some may intentionally drag their feet if they are paid on a monthly basis rather than being paid a flat fee or per disputed item.
If possible, increase your income.
If you have the time, increasing income with a side job or with your current work (whether via extra hours, diligent efforts, education, or otherwise) can be beneficial.
Get educated on taxes.
Some people can save hundreds if not thousands every year after getting better educated on tax avenues to do so, especially if you aren't familiar with taxes. A little time can save a lot of money, often much more than people's hourly wage or annual salary converted to an hourly amount.
Don't neglect warranties & insurance.
One of the most common ways that people get into debt is from not having adequate savings to cover unforeseen circumstances in life when they don't have the right warranties &/or insurance to cover those expenses.
Auto insurance is something where if you can't afford to pay for a comparable car in cash, you may want to consider getting full insurance coverage if you currently only have liability, especially if you've caused a prior accident.
if you don't have medical insurance, I'd highly recommend getting at least some form of coverage.
If you have a history of short or long-term disability or think that you could be at risk, consider those insurance as well if you wouldn't have the savings to cover yourself adequately in the event that you no longer were able to work. In addition, be sure to pay your taxes and not underreport so that if you developed a long-term disability, you wouldn't shortchange yourself by getting less help from the government than you would receive otherwise. Be familiar with how much money you'd receive in the event of a long-term disability from social security. If you engage in high-risk activities that can put your health at risk, consider refraining until the point when you can acquire short/long-term disability coverage.
In some cases, you can even find free warranties or other assistance, such as free cell phone insurance & roadside assistance that can come with certain credit cards just by having the card. Knowledge is power in this arena. With cell phones, it's often best to also purchase a phone case for better protection.
Don't establish new "bad debt."
Avoid acquiring debt on unnecessary expenses, like boats, furniture, and otherwise.
If you're doing something like buying a new car every 3 years, consider shifting your habits. The most rapid depreciation vehicles experience is in the first 5 years, so older, reliable, low-mileage vehicles are a strong option. When you purchase a vehicle, be mindful of issues like depreciation rates for that vehicle type, typical maintenance expenses for that vehicle make (& model if possible), and miles per gallon, all of which are available in advance in many cases for models. If you need to purchase a car, try to save up as much as you can in cash so that the payment is lower for a downpayment if you need to have a loan at all and don't pay for it in cash. In some cases, the rate on car loans can be lower than what you get at banks. For instance, right now I have a car loan, but I put over 50% down, the car loan rate is <2% on a 3-year loan, I acquired a 5-year warranty, I average over 35 MPG on the SUV, I don't have to worry about replacing a battery since it's not a hybrid, and the rate I'm getting at banks is around 5% for a general savings account where I can take out money at any time without penalty and is FDIC insured. I might have the vehicle for 5 or 10 years before replacing it depending on factors like how many miles I'm putting on it. Try to have a car for 2-4 times as long as it takes to pay down the loan if you opt to get a loan instead of paying in cash. Especially if you have low credit, consider cash-only cars, since interest rates on auto loans will tend to be much higher for those with low credit. Focus more on what's needed than what's cosmetically appealing and comfortable.
Keep separate designated accounts for major fixed expenses w/ no monthly fees or transfer fees incurred.
In order to budget effectively, I recommend that you h